2014 Bank Of England Report on Money Creation

posted by Brani Rusanov | 35pt
September 24, 2016

Hi Professor Wolff,
I apologize in advance if you've previously covered this topic, but I have found it immensely interesting for quite some time, and yet I feel like nobody talks about the banking system in its true form. I'd love to get your take on it as your explanatory skills are second to none.
The 2014 report released by the Bank of England (link below) outlines how banks no longer use deposits made by customers as a basis to then loan out to others. Instead, when a bank makes a loan, it simply creates the credit out of thin air, and with the newly created credit it also makes a matching debt. The conclusion is therefore that banks are responsible for the total money supply of a given economy - the more people borrow from banks, the greater the money supply. As people pay off their debts, then the money supply shrinks. To my mind, this unrestrained method of money creation is directly responsible for the incredible volatility of the market and the severity of the last financial crisis (economic bubbles and bursts are much easier to fuel and come down with more force when money creation has no limit). There is also the interrelationship between commercial banks and the central bank - the issuing of central bank reserves etc, which I find a little more confusing. Could you please elaborate on this topic in your monthly updates/weekly podcasts, and on any other negative consequences of such a system of money creation?
Is the alternative to this unaccountable banking system an interest free, nationalized banking system (like the one in Syria) that works as a general service rather than a profit seeking institution?
Without taking much more of your time, I would also like to link this topic of money creation with the financing of government debts (link that may be helpful included below). You've previously mentioned that the wealthy, and the investment institutions of the world are now seeking safer investments in government bonds, instead of investments in productive capital that would (in a perfect world) create jobs and growth for the middle and lower classes. The governments on the other hand, are desperately seeking these loans since they are struggling for revenue that would normally come via taxes and fees. But since capitalism undermines itself by cutting wages, by creating unemployment, and because our politicians are bought and will not tax the wealthy, our governments are forced to borrow to fund services. But by borrowing from the most powerful cliques in our society, the governments now face a strict obligation to compensate their debts - which means austerity around the globe.
My question is, why can't governments fund their expenses the same way that private institutions or private persons would - by "creating" credit and an equal debt via the central bank? Would this not give governments breathing space to at least lessen some of the devastating effects of austerity - and not rely directly on wealthy investors/institutions?
Thanks!
FINANCING GOV DEBTS
http://positivemoney.org/how-money-works/advanced/what-about-the-national-debt/
OFFICIAL BANK OF ENGLAND REPORT ON MONEY CREATION
http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2014/qb14q102.pdf
NEWS REPORT ON BANKING SYSTEM EXPOSE
https://www.theguardian.com/commentisfree/2014/mar/18/truth-money-iou-bank-of-england-austerity

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Richard D. Wolff is Professor of Economics Emeritus at UMass Amherst and a visiting Professor in the Graduate Program in International Affairs of the New School University in New York. Richard Wolff is also a co-founder and active contributor of his non-profit: Democracy at Work